Are you ready for E3? (Part II of II)

Summary of industry analysis 

Due to a range of factors, which make it difficult for a new company to take part in the video games industry, the threat of new entrants is low. First of all, the industry is characterized by huge economies of scale, as the producers need to sell great numbers of games in order to make a profit. Second, the capital requirements are very high because of the increasing costs of games development and consoles manufacturing. It is also costly for the customers to switch to a new producer, because this would mean they have to buy a new console. 

Suppliers pose a medium level of threat. The main reason is the crucial importance, which their input has for the final product. Also the costs for the input are high relatively to the total purchase. However, the concentration of the suppliers is relative low as they are many video games publisher but just three producers of consoles. Threat of forward integration exists as well, due to the fact that some of the big publishers of video games have the resources to try to enter the industry. 

Although there are some substitutes for video games and the differentiation is fairly low, buyers don’t have a lot of bargaining power. Their concentration relative to the industry is low and they have to face high costs if they want to switch to one of the substitutes (buy a computer for example). To have the newest console or play the latest games is considered to be a sign of “coolness” at school, so strong incentives for buying exist. 

The power of substitutes is considered to be low to medium. The biggest threat comes from computer games. Due to the fact that almost every family possesses at least one computer, computer games are a cheaper alternative to video games as one doesn’t have to buy the console. However, the lack of multiplayer function impairs their performance, especially when video games are regarded as a family or group activity. The switching costs are high as well and the buyer propensity to switch is fairly low, particularly for buyers, who are addicted to playing video games. 

The video games industry is characterized by medium rivalry, which is getting more intense lately. The industry grows slowly as they are three establishes players, that compete among each other and every one of them try to outsell the others and become the market leader. The rivalry is enchanced by the low level of product differentiation and the high fix costs of the manufacturing of the consoles. However, the rivalry is reduced by two major factors: the switching costs for the buyers are high and there is a lack of understanding of the technological differencies of the consoles, because of their complexity. 

As a result of the stage of these five forces in video games industry, the industry is considered to show a relatively high level of profitability. 

Interconnections and interrelationships between the two analyses 

There are several interconnections between the macro-environmental analyse and the industry analyse that can be found. Mostly the macro-environmental trends have an impact on the forces, which determine the profitability of the industry. Sticter regulation of the video games content limits the scope of games a new company can present to the market while trying to enter the industry and make this more difficult for them. The increasing licensing fees for the exclusive rights to intellectual property of media companies or sport organisations are addtitional obstracles for entering the industry as they enhance the capital requirements. 

Economical factors such as decreasing disposalble income have also an impact. People start searching for cheaper substitutes so the power of substitutes for video games grows. The bargaining power of buyer becomes higher as well, as buyers condition their purchases on the price-performance ratio of the product. 

As the number of video games players goes up, the demand for a larger library of games rises. This leads to an increase in the power of suppliers due to the fact that the producers need them to develop more new games and develop them faster. 

With the rapid advance of new technologies it is to be expexted that new substitutes for video games will be introduced to the market for enertainment in the near future. Thus, the power of substitutes will rise, as well as the bargaining power of buyers. 

The growing rivalry in the video games industry prompts the companies to improve their products, sell them cheaper and expand their target group. As a result video games become amore attractive kind of entertainment for a broader audience.